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Certified Tax Coach

Grow Your Wealth with Tax-Advantaged Income

August 24, 2021 by Admin

Businessmen handshakeWhen it comes to minimizing taxes, most people focus their efforts on maximizing deductions. They look for opportunities to reduce their taxable income by taking advantage of tax laws that allow a wide variety of expenses to be claimed as costs of doing business. This technique is a critical component of your comprehensive tax strategy, but it isn’t the only opportunity to bring your tax bill down. Think bigger, by looking for ways to shift current income or generate new income that enjoys favorable tax treatment.

Your Certified Tax Coach is an expert at thinking outside the tax box to reduce your tax liability. You can partner with these professionals to identify methods of creating tax-deferred or tax-free income to grow your wealth more quickly.

The Trouble with Traditional Investment Income

Average taxpayers rely on traditional financial products for saving and investing. Examples include standard savings and money market accounts, certificates of deposit (CDs), mutual funds, and brokerage accounts. The problem is that income earned from interest, dividends, and increased share value is subject to fairly high tax rates. Certainly, these options play an important role in your financial plan, but there is no need to rely on them exclusively. Instead, maximize use of tax-deferred and tax-free programs to reduce your total tax liability.

Options for Tax-Deferred Income

It’s no secret that it is getting harder to achieve the retirement lifestyle you want. Setting money aside to ensure you can enjoy the years after you leave the workforce is a top priority. The good news is that there are retirement savings programs specifically designed to make this goal more achievable. They offer an opportunity to earn tax-deferred or tax-free income, which lowers the total amount you hand over to the IRS.

Traditional IRAs, certain employer-sponsored retirement programs, and specific types of annuities enjoy tax-deferred status. Essentially, you contribute a portion of your current income on a pre-tax basis. You don’t pay income taxes on that amount today. Instead, taxes are assessed when you eventually take distributions.

This benefits you in two ways. First, your money stays with you longer, so you can generate interest on funds that would otherwise be lost to tax. Second, most people find themselves in lower tax brackets after retirement. That means you pay less later than you would if you paid today.

The Tax-Free Alternative

If your goal is to generate income that is completely free from taxes, you have options. Certain types of life insurance, specific annuities, and retirement savings plans like the Roth IRA make it possible to eliminate taxes on a portion of your income. Unlike tax-deferred plans, your contributions to these types of programs are made from after-tax dollars. In other words, you pay income tax on the funds you set aside in these accounts in the same year that income is earned. However, once you have paid that initial income tax, you don’t owe another penny. Any increase in value from interest, dividends, and similar is completely tax-free.

The bottom line is that minimizing taxes is more than finding deductible expenses. You can drive your tax bill down by incorporating a variety of techniques into your overall strategy. Shifting income or creating new income that enjoys favorable tax treatment is another tool you can use to reduce taxes and grow your wealth.

Learn more about transitioning to tax-advantaged income by working with a Certified Tax Coach.

To set up your consultation, contact us at 801-553-1120 today. When you schedule a consultation, you’ll receive a book called The Great Tax Escape as our special gift.

Filed Under: Business Tax, Certified Tax Coach

Deducting Business Expenses: Your Motor-home or Recreational Vehicle

March 18, 2020 by Admin

Sorenson & Company - Deducting Business ExpensesHere’s an idea: Why not purchase a motorhome or recreational vehicle and deduct it as a business expense?

As long as you use it for business this could be a really sweet deal. And if you just happen to use it for pleasure once or twice, that’s no big deal, right?

You won’t be the first person to think of this and if you don’t follow the IRS rules, you won’t be the last to experience the consequences. The courts and the IRS have battled this discussion out several times. Both have been challenged trying to confirm when the motor home is a business vehicle and when it is a business lodging facility.

Does it matter?

It does. The business aspects of owning a motorhome will qualify for tax deductions, but this comes with a set of rules.

Bear this in mind: if you travel for business and plan to deduct your motorhome as a lodging facility, be sure to count the number of nights you use it for business purposes and use that to measure the number of permissible deductions.

On the other hand, if you use your motor home or RV as a second home, you would deduct the business percentage of its use for business travel without having to consider Section 280A impediments.

It can be complicated, so be sure you understand the guidelines.

Before you can deduct the business expenses associated with your motorhome you need to determine what it actually costs to operate the business-related usage. Along with depreciation and interest or lease payments, be sure to add insurance to the equation.

Take into consideration all of the expenses associated with maintaining your RV. Here are a few other expenses to include in your calculation:

  • Motor oil
  • Gas
  • Car Washes
  • Tires
  • Licensing Fees
  • Property Tax
  • Parking
  • Tolls

Of course, you’ll only be limited to deducting your business-related expenses. Will painting or wrapping your recreational vehicle with advertisements qualify when deducting personal miles?

You know the answer….

It will not.

Maintain Good Records

The best way to ensure you maximize your allowable deductions on your motorhome or RV is to keep impeccable records. Keep a mileage log and record every single trip—business and pleasure. Make sure you have accrued more than 50 percent business nights.

Even if you think you have a great memory, don’t store this information in your head. Record every single night you use your motorhome for business or personal lodging.

Last but certainly not least, keep IRS Section 280(f)(4) top of mind. This section says the use of your motorhome for overnight business lodging produces deductions for business travel and that business travel is not subject to the vacation home rules.

For a clear explanation of tax deductions for motorhomes or RVs, contact one of our tax professionals. Better to plan ahead than to clean up a mess after the fact.

Contact us today by calling 801-553-1120 or request your free consultation online now. As a thank you for scheduling your consultation, we’ll provide a free tax planning book, The Great Tax Escape.

Filed Under: Certified Tax Coach

Getting Around in the Land of OZ

December 18, 2019 by Admin

Businessman standing in the mountains watching the distanceThe 2017 Tax Cut and Jobs Act created Opportunity Zones. These special economic zones give investors and business-owners a chance to do some good in a depressed area, make some money, and obtain some significant tax benefits. That is a pretty powerful combination.

For this reason, OZ investments have a significant edge over traditional 1031 exchanges. If owners exchange one investment property for another, they may reap some capital gains tax breaks. But 1031 exchanges only apply to real property, OZ investments apply to any capital asset. Additionally, 1031 tax breaks usually only apply when the owner dies.

However, unlike 1031 exchanges, which are rather straightforward, there are a number of intricate rules concerning OZ investment tax breaks. A certified tax coach has the tools you need to maximize these benefits.

The Basics of Opportunity Zone Investments

There are more than 8,500 opportunity zones throughout all fifty states and Puerto Rico. Most, but not all, of them are in the South and Mountain West. The IRS will certify an area as an Opportunity Zone if:

  • The state or territorial government nominates it, and
  • The area has a 20 percent or higher poverty level, or
  • Median household income is at least 20 percent lower than the nearby areas.

In practical terms, these numbers mean that Opportunity Zones are usually not hopelessly depressed areas. Many times, they are downtown neighborhoods that need a redevelopment jump-start. Other times, they are places where suburban sprawl is approaching, but has not quite arrived yet.

Types of Investment Opportunities

In general, either people or companies can invest in Qualified Opportunity Funds. A QOF directs invested funds into the Opportunity Zone. This setup decreases investor risk and helps ensure that more money goes to the Zone itself. In fact, in most cases, at least 50 percent of the QOF’s revenue must come from the OZ, and at least 90 percent of investors’ money must go into the Zone.

Some QOFs are direct funds. These entities operate businesses inside the OZ. Some vice or sin businesses, like massage parlors and liquor stores, are not eligible for OZ status. Other QOFs are indirect investment funds. The investor buys an equity interest in the QOF, which then reinvests this money into an Opportunity Zone business. According to complex IRS rules, at least 63 percent of all indirect investments must go to Qualified Opportunity Zone Business Property. That’s a good thing if, as is often the case, the QOF is a diverse, multistate entity. Some additional safe harbor provisions give indirect investors even more flexibility.

Tax Benefits

As mentioned, OZ tax benefits generally involve capital gains tax breaks. The three major ones are:

  • Deferral: Investors need not pay capital gains tax on any Opportunity Zone investment property until 2027 or until they sell or exchange any portion of the investment.
  • Exclusion: Lawmakers want to encourage long-term investment in these areas. So, investors who keep their money in the OZ for at least five years may exclude 10 percent of their capital gains tax. That exclusion increases to 15 percent after seven years.
  • Basis: This tax break is probably the big one. If investors hold the capital asset for more than ten years, the IRS calculates basis on the date of sale as opposed to the date of purchase. So, the investor basically pays no capital gains tax on the property’s increased value.

State tax rules may or may not be the same. So, it may be necessary to track the investments separately to maximize tax benefits.

To learn more about this tax break, and others like it, contact a certified tax coach near you.

Contact us today by calling 801-553-1120 or request your free consultation online now. As a thank you for scheduling your consultation, we’ll provide a free tax planning book, The Great Tax Escape.

Filed Under: Business Tax, Certified Tax Coach

Pursuing the right path: Which business entity is right for you?

November 20, 2019 by Admin

Businessmen handshakeCritical Choices: How the Business Entity You Select Impacts Your Taxes

Entrepreneurs have a long list of special opportunities to save on taxes. However, your eligibility for some tax breaks depends on the decisions you make as you are planning and launching your business. One of the most critical choices is which business entity you will operate under. The Amazon Best Selling book, The Great Tax Escape, walks you through each of your options, spelling out the benefits and drawbacks of the most common business structures.

Business Entity Basics

It’s no surprise that you must pay taxes on any income your business generates, but you might not realize that the same income can be taxed differently depending on how your business is organized. While some types of businesses are considered separate taxpayers from their owners, others require that you include your business income on your personal tax returns.

Your tax rates aren’t the only thing impacted by your choice of business entity. The structure you select affects whether you are personally responsible for business debts and whether you can be held personally liable if the business is sued. When your business exists as a separate entity, the business itself can apply for credit, and these types businesses can continue to operate when you decide to move on or retire.

These are a few of the most common options:

Sole Proprietorships and Partnerships

When you are starting out and working alone, it is easy to operate as a sole proprietorship. Essentially, you and your business are one and the same for tax and legal purposes. Simply register your business name with the state, and you are ready to launch. You can still have employees as a sole proprietor, but you own the entire company.

The simplicity of this structure makes it quite popular, but it isn’t always the best choice for entrepreneurs. Business income is treated the same way as other personal income for tax purposes, and you assume full liability for all business debts and legal issues. That puts your personal assets at risk.

Though there is slightly more paperwork involved, a partnership is quite similar to a sole proprietorship. Taxes and legal liability are the responsibility of all partners, and partners can be sued individually or collectively for the actions of one business owner.

Limited Liability Companies (LLC)

It is common to see the initials LLC after many small and medium-sized business names, and there is a good reason for that. LLCs offer business owners many of the protections that larger corporations enjoy, without the complexity and cost associated with incorporation. With LLCs, business owners are considered separate from the business itself for the purpose of taxation and legal liability. This can lead to significant tax savings, and it protects personal assets from business-related debts and lawsuits.

Of course, setting up an LLC is more complicated that operating as a sole proprietor, so some entrepreneurs choose to hold off on this step until the business begins to be profitable. Your choice of business entity can dramatically impact your bottom line tax bill, and it will affect your long-term level of risk as the organization grows. To learn more about your options for structuring your business, contact us today by calling 801-553-1120 or request your free consultation online now. As a thank you for scheduling your consultation, we’ll provide a free tax planning book, The Great Tax Escape.

Filed Under: Business Tax, Certified Tax Coach

The 199A Real Estate Rental Safe Harbor Provision and You

October 30, 2019 by Admin

realtor holding keysThis addition to the Internal Revenue Code allows taxpayers to deduct 20 percent of any Qualified Business Income they receive during a tax year. But the exact definition of QBI had long been uncertain. IRC Section 162 states that a trade or business “generally includes any activity carried on for the production of income from selling goods or performing services.”

That’s not a very helpful definition, especially in the real estate ownership context. IRS Notice 2019-07 substantially clarified the picture. It establishes a safe harbor for real estate rental income. If such money meets the 2019-07 test, it is automatically QBI. However, the safe harbor provisions are still rather subjective, and there are some limitations.

Certified tax coaches may provide the information you need in these situations. These professionals help navigate the Tax Code’s complex provisions.

Specific Requirements

Instead of the income itself, or the property itself, the real estate safe harbor provision focuses on the landowner’s activities. If the owner spends at least 250 hours a year on rental activity, any income from that property is QBI and eligible for the 20 percent deduction. Rental activity includes things like:

  • Making the property available for rent or lease
  • Advertising the opening
  • Verifying rental application information
  • Negotiating lease terms
  • Executing completed leases
  • Collecting rent
  • Managing the property
  • Supervising employees or contractors

The owner can delegate these functions to partners, employees, or independent contractors. So, if the owner hires a part-time maintenance worker who spends Saturday mornings fixing sprinkler heads, servicing tenant appliances, and so on, those 200 hours count toward the 250-hour minimum.

Property procurement, improvement, and investment activities specifically do not count as rental activities. Time spent commuting to and from the property does not count toward the 250-hour minimum either.

There are also some exclusions. Owner-occupied property, even if it was only for one day in the year, never qualifies for the 199A income deduction. Triple net lease property (the tenant pays rent, utilities, taxes, and insurance) never qualified either.

Practical Considerations

For the most part, multi-unit property usually qualifies for the safe harbor allowance. It does not matter if the property is residential or commercial. It also does not matter if the owner intends to sell the property or move into it at a later date.

Single-unit property probably will not qualify. It’s very difficult to meet the hourly requirement in these situations. 250 hours is over six weeks of full-time work. Additionally, the aforementioned residency and lease restrictions often apply.

Contact a certified tax coach near you to learn more about the QBI deduction.

Filed Under: Business Tax, Certified Tax Coach

Seriously? Sweat Equity is Not Deductible?

September 24, 2019 by Admin

man thinkingThe labors of love you pour into your business may have a fair market value on the street, but how do you accurately translate your net worth?

Is it $100 an hour or does it range in the thousands? For the CEOs of some publically traded companies that number is often tens of thousands an hour.

But you won’t be able to calculate the value of your efforts until you have been paid.

What About Charity Donation?

Okay, we know, you’re worth every penny, but when you donate time to charity or you’re looking to deduct the cost of your time spent, it can cause confusion at tax time. For entrepreneurs who assume their sweat equity is deductable this can result in shock and disappointment.

The Startup Phase

Starting a new business is an exciting time for an entrepreneur. Ideas are taking shape and heart-held dreams are becoming tangible realities. But unless they’re backed by a substantial nest egg or loan, most businesses need time to produce enough cash flow to compensate the owner for development time.

Many business owners spend hours establishing their businesses before they even open the front door (virtual or otherwise). Ensuring their company’s viability doesn’t often happen overnight. Market testing and calculating pricing take time.

What’s the legal answer to this question?

Well, perhaps it can be found in a recently decided court case. The issue? Whether or not a taxpayer can deduct the value of sweat equity, i.e. services for which he/she is unpaid.

In short, a sole proprietorship reported a loss in his business providing services at no charge. The amount was substantial: $29,500. The taxpayer used this loss as a deduction against his income of $234,000 earned that year (2014). While he had not spent any actual money out of pocket, he argued that research was needed to succeed in his business; yes, sweat equity.

The court ruled against the taxpayer in this case because in order to take a deduction, one must pay or otherwise incur an expense to be eligible to deduct it. The labor itself is not within the meaning of Code Section 162.

Donating Time to Charity

What about taxpayers or business owners who donate their time to a charitable cause? We’ve already determined their time has value. Certainly, the court must allow for this type of deduction, right?

Well, no, not this one. Donations of services are not deductible charitable contributions. However, if business owners or taxpayers donate the value of their work in cash so the organization can hire someone else to do the work, it then becomes a tax-deductible donation.

Donated labor is not deductible even to nonprofits because in the normal earning cycle of a business, the net value of the services donated is zero.

For example, consider service on a nonprofit board. If you charge for the work, you would earn according to your pay scale. However, in donating your services you are not paid.

Now, there’s a way around it.

If the organization pays you for your service and you then donate it, you would be reporting it as income. You would owe and pay taxes on the money earned and then be able to deduct your cash donation. By not receiving the income, you avoid reporting the fees in additional revenue for the year, and you’ll also forego the charitable deduction. Either way, the result is the same.

While your personal valuation of sweat equity you put into your business may result in Fortune 500 positioning, it won’t help you reduce your tax bill.

Certified Tax Coach, we can assist you. Contact us today by calling 801-553-1120 or request your free consultation online now. As a thank you for scheduling your consultation, we’ll provide a free tax planning book, The Great Tax Escape.

Filed Under: Certified Tax Coach

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